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For Use Upon Delivery
at 10:am . , EDT
Saturday June 23, 1973

Remarks of



Board of Governors
of the
Federal Reserve System
79th Annual Convention
Florida Bankers Association
Bal Harbour, Florida
June 23, 1973


The development of the holding company form of banking is a
positive event in the history of banking in the United States.

It might

be said that the 1970 amendments to the Bank Holding Company Act wrote
"Enough" to the time since 1933 when public policy toward banking was
that of an anxious parent toward an errant child.

That is somewhat

ironic, since the idea of amending the Bank Holding Company Act took
shape in the late 1960fs very much in the tradition of keeping banking
from getting off the reservation, this time through the gap in the reg­
ulatory fence freeing the one-bank holding company from regulation.
The Federal Reserve Board, which had been asked for its advice
by the Congress, agreed that the one-bank break in the regulatory
defenses against the mixing of commerce and finance was dangerous and
should be mended without delay, by making holding companies controlling
any number of banks, even one, subject to the same rules.

However, the

Board went on, in its statement of Principles of February 20, 1969, to
look through the immediate problem to larger matters, stating that:

". . .consistent with continued growth and development
of a dynamic and increasingly complex economy, banks
should be granted greater freedom to innovate new
services and procedures, either directly, or through
wholly-owned subsidiaries, or through affiliates in
a holding company system. . . . "

-21 . . .Bank holding companies should be allowed
to enter certain nonbanking areas of activity. . .
which would facilitate broader services for the
public. . . . "
This, in effect, suggested a much greater charter for banking
than had ever been known by those whose entire careers had been under
the restraints imposed by the banking reforms of the 1930's.

Also, the

Board was suggesting that banking should no longer be regarded as a
ward of the government, strictly constrained to its financial knitting,
but, instead, that banking be encouraged by law to broaden its interests
into the field of closely related businesses.
Furthermore, the Board's Statement of Principles suggested a
substantial shift in regulatory philosophy.

The regulatory outlook

that grew out of the banking reforms of the 1930's -- which at least in
the public view, were reforms necessitated by bank failures in the 1920's
and 1930's -- can be characterized as one of avoidance of risk, with
only limited concern for maintenance of a competitive climate. Banking,
suffering from rather severe trauma, made no significant efforts to
escape from this over-protective regulation for decades.

It was not

until the 1960's, when the one-bank holding company wave -- and the
regulatory response to it by the Federal Reserve Board -- made the
currents of change begin to flow in earnest.

The Board's 1969

Statement of Principles suggested a resetting of the regulatory compass.
In place of the more restrictive regulatory style, the Board, in
proposing that banking should be allowed new freedom to compete, stated
that in considering whether a particular activity by a bank holding

-3would be consistent with the public interest, the key should be whether
such an activity's benefits to the public would outweigh any potential

Benefits to be weighed against dangers, the statement added
1 . . .would include greater convenience to the
public, increased competition, and gains in
efficiency for the economy generally as well
as for the holding company. . . ."
And the potential dangers against these benefits were to be

we ighed, included
1 . . .undue concentration of resources, decreased
competition, conflicts of interest. . .and dangers
to the soundness of the nation's banking business."
With this, the regulatory needle moved to a new course charted
out of concern for the health of the general economy, the modernization
and efficiency of the financial industry and the convenience to the
public of receiving financial services in a more competitive atmosphere,
this to be accomplished a balancing of pros and cons, rather than a
simple seeking out of cons, in considering extensions of banking's
economic concerns.
I am sure that what I have been saying -- and I am of course
speaking for myself only -- to this point sounds to you like the intro­
duction to a speech with which all of you are by now quite familiar -the fundamental change in the nature of banking brought about by the
modernization of the Bank Holding Company Act in 1970.

The need for

bank management to move away from thinking altogether like bankers, and
to think, instead, like corporate managers looking out over a related
set of businesses which includes one or more banks would be the main theme.

-4A very great change has in fact occurred.

I have deliberately

organized the introduction of my remarks to emphasize, and even to give
deeper than usual emphasis, I hope, to these profound changes in the
outlook for banking -- and in the outlook of bank regulators -- caused
by the Bank Holding Company Act Amendments of 1970.

Bank management

must indeed, under present circumstances, take on many new attributes
scarcely needed by the banker of previous decades, whose business was
almost entirely attuned to the profit margin lying between the cost of
obtaining funds and the price others would pay to use those funds.


is indeed true that the bank holding company format, as extended by the
1970 amendments, makes a great many bank managers heads of diversified
business groups, of which the non-bank parts demand methods, talents
and attitudes little known to the banker doing exclusively a banking
As one recently come from banking, I am keenly aware that the
1970 widening of banking*s horizons was required, that banking needed to
become more competitive within and outside its own realm, and that
banking as an industry faced the risk of ossifying within the shelter
of old-style regulation.

Also, as a banker, I was aware before I became

a regulator that much of banking was lagging behind the technological
and managerial capacities of other businesses, and the industry was
therefore in danger of losing its place and share in the American
economic scheme of things, to the detriment of our financial system and
to the detriment of the public through the weakening of a key competitive
force within the economy.


For all these reasons and more, I welcome the expanded role of
banking, and I welcome the new orientation of bank regulation that
parallels banking's changed status.
Nevertheless, as you have probably guessed by now, I am not here
today to expound on banking's new era, or to urge you to step aside
immediately for someone fresh from business school, with computer soft­
ware dangling from his pockets, hardware glinting in his eyes and who
can only see the banking part of his corporation as a treasury, somewhat
unaccountably hedged about with numerous and bothersome rules.
Let me, therefore, offer you a first word of caution -- resist the
temptation to strike your banker's flag the day you become a diversified
bank holding company.

You are still first and foremost a banker, in a
business strongly affected by the public interest.
This is, of course, presently true statistically, for
even bank holding companies that have aggressively
sought non-bank acquisitions still have most of their
assets in banking.

But in my view you will be still

basically a banker even if the statistics go the other
way, and the corporation you manage has the greater
part, or a large minority, of its assets in non-bank
businesses, because you will still control a bank, or

As such you will still be in a business -- you

can say it with pride -- that is a public trust, even




if not a public utility.

You will still be

charged with the special trust of holding and
using the public's money.

You are therefore at

the controls of a business -- banking, in a
bank holding company -- that must continue to
deal at arms length with the other sectors of
the economy, that must be subject to special
public accountability and regulation, that has
a special role in the nation's monetary posture,
that must preserve a special independence of out­
look and a special integrity, a private business
with essential and unavoidable public considerations.
And now for a second word of caution -Although the bank holding company amendments of 1970
opened up substantial new opportunities for the addi­
tion of non-banking profit-making assets to banking, be
wary of the potential pitfalls inherent in diversifica­

For example, as I review bank holding company

cases I am troubled by a sense that too many bankers may
be aware only of the opportunities of acquiring
assets, and not cognizant enough of the responsibilities
they simultaneously accept in connection with management
of those assets.

I would remind you, in this respect,

that in the bank holding company with non-bank
subsidiaries, even in subsidiaries closely related to
banking, such as mortgage company operations, bankers
are dealing with businesses that are, in fact,
significantly different from banking in many important


There are, therefore, pitfalls in bank

holding company diversification that some have
compared to the difficulties resulting from the
wave of conglomerate and congeneric business mergers
and acquisitions of the I9601s.

My point is that,

absent planning and deliberate action, successful
management of a diverse enterprise, more often than
not, requires either sheer managerial magic,
astounding good luck, or long, hard, slow learning.
Why do bankers form bank holding companies?

Let me recite some

of the reasons given recently by a bank analyst:— ^


To obtain geographic diversification into areas pre­

cluded to banks by various State banking laws and by
Federal regulation against branching across State lines.

To enter closely related areas such as factoring,

consumer finance, mortgage banking, and investment manage­

While these are permitted activities for banks, they

could be acquired and could be conducted more easily as
subsidiaries of a holding company.

To permit issuance of commercial paper at the holding

company level.

To free remuneration and other benefits and

inducements from the banking stigma of low pay, poor
plans, etc.

George L. Hacker, First Vice President,
Blythe Eastman Dillon 6 Co. , address of
May 29, 1973



However, this analyst added:
"In my opinion, most banks that formed one-bank
holding companies have an albatross around their
collective necks. . . . Their reasons for forming
the corporation, stated simply, were "everyone
else is doing it" or "diversification is the
answer to squeezes on bank earnings". . . . The
plain facts are that, with exceptions, most onebank holding companies acquired nothing meaningful
either because, with their shares selling at 10
times earnings, it was very difficult to acquire
a company whose earnings were being capitalized at
100 times, without substantial dilution, or secondly,
bank management, again with exceptions, was nervous
with even the thought of owning a computer subsidiary
whose president was under 30 and probably had a
Like the analyst I have quoted, it is not my intent to warn you
away from bank holding company acquisitions, but to emphasize that, where
angels fear to tread, bankers would do well to be wary.

My message is go

slow, look well to your footings, remember your obligations as a banker -your regulator is not likely to forget them -- and, of critical importance
in diversifying, remember above all that the major element of success is
good management.

And of all the things in the business world, good

management is the hardest to come by -- or to keep if you are lucky
enough to buy it or merge with it -- and the slowest to develop,

if you

have to raise your own.
Let me, therefore, make a few observations on management as a
note of caution to the banker diversifying.
The management problem is not necessarily solved when you find
a well-run company that you can bring into your bank holding company.

-9Generally, the company will have been a medium-to-small organization,
managed by men accustomed to making the final decisions, and accustomed
to making those decisions upon the relatively narrow basis of the ins
and outs of their particular business.

As a subsidiary of a bank

holding company, even given the maximum autonomy prudently permissible,
they will no longer have the final say.

Further, their decisions will

have to be made in the broader context of the well-being of the entire
holding company organization.
For such reasons, excellent management brought into a holding
company by acquisition may soon exit because it cannot accommodate
itself to the new environment.

Or, where a highly successful "mom and

pop" type company -- bank or otherwise -- is acquired, the former
owners -- having realized in capital gains upon their years of hard
labor developing the business -- may relax in their hired-hand status
in the holding company, and pay less and less attention to the business
their personal efforts made successful.
I would feel remiss in leaving you with these sobering
observations, and no suggestions.

I do not think the management

problem in a diversified company, difficult as it may be, is insur­

What is required is patience and a plan.

I said at the

outset of this section of my remarks that my message was, in part, go

In fact, it is in large part, go slow.

I suggest that the pit­

falls of poor management of diverse businesses in a bank holding
company, given the probability that the non-banking businesses in
the company are alien territory to bankers at the head of the company,



call for something like a well laid out -- and faithfully followed —
management development program.

This should involve building, over time,

a management team -- banking and non-banking -- used to dealing with one
another, on top of its problems and up to date technically; a team that
will have learned how to operate the various parts of the holding company
so that each grows and profits, in the setting of the well being of the
company as a whole, and particularly, with an eye to the need for
preserving sound banking, and serving the public benefit, in the context
of bank holding company operations.
This strategy may also mean that you pass up a few potential
acquisitions that may come to your attention before your managerial
resources are fully developed, or even -- perish the thought -- that you
might find it necessary to abstain from expanding < e novo.
Meanwhile, during a substantial part of this development period,
it is possible that the bank holding company will have to struggle
through a learning period that is hard on profits, juicy though the
apple of diversification may seem until bitten.

This is among the reasons

that the Federal Reserve Board, as I am sure all of you are aware, is
taking a keen interest in the capital structure of bank holding companies
and their affiliates.
What is our objective in taking an interest in the financial
structure of bank holding companies?

It is the ancient regulatory

objective of protecting the safety of bank deposits, and the soundness
of the banking system, when that banking system as a whole, and its


11 -

individual components, comes under the new exposures to risk involved in
diversification under the bank holding company format.

In various of its

statements, the Board has commented about additions to capital accounts
or in other ways indicated its interest in the general condition of the
holding company or its subsidiaries, either bank or nonbank.

In our review

of the financial aspects of bank holding companies that come before us, we
analyze prospects, managerial capabilities, earnings, capital adequacy,
and debt structure where debt is a significant percentage of net worth.
We have set no hard or fast rules and we regard an individual analysis
as always necessary.

When debt levels of holding companies become large

in relation to net worth, the holding company is asked to inform us of
the use to which the debt is put, and to demonstrate its ability to con­
tinue sound operations while servicing this debt.
What are our procedures in this respect?

They may be summarized

as follows.
Upon receipt of an application to become a bank holding company,
or to expand an existing company by acquiring either a bank or nonbank,
the general condition of each bank involved is reviewed.

When capital,

particularly equity capital, is regarded as below appropriate levels,
applicants are asked about their plans for increasing capital. Existing
or proposed nonbank subsidiaries are likewise analyzed.

It is expected

that such subsidiaries will maintain equity capital at a level equal to
that maintained by the average firm operating independently of any holding

While an adequate amount of equity capital cannot alone assure

-12the soundness of any individual institution -- the element of good
management is over-riding -- sound capitalization permits good manage­
ment to concentrate on viable development of the company.
There are other pitfalls that I could go into, and that concern
me as a member of the Federal Reserve Board, when I must consider a bank
holding company application.

I would take time to emphasize only one

other, however, based again on my own background in banking.

This is,

that as the bank diversifies its interests by acquiring non-bank businesses
there is a temptation to seize upon the fair-haired boy of banking -- the
commercial loan officer -- as the only candidate considered for promotion
to the management of non-bank businesses or the holding company itself.
But the loan officer may have become a highly specialized man.


the more successful he has been, often the more specialized he has be­

Therefore, promoting him to the head of non-bank businesses can

have two undesirable results, unless he is a man of truly uncommon
depth and breadth.
First, you deprive yourself on the banking side of one of your
most needed people, a good loan officer.

Since you are still chiefly

in banking, and lending will continue to be your primary business,
at least for some time, this can have both short and long range un­
desirable effects upon the success of the entire organization.
Second, the specialized loan officer, with a few exceptions,
will find himself untrained, unprepared and unknowing in his new managerial

Thus your new non-bank unit, at a time when it is imperative that it

receive the best in managerial leadership, may not have the benefit of

-13such leadership.

1 must point out that I have nothing against commercial

loan officers -- as a matter of fact, some of my best friends are of that

What T am trying to emphasize is that as proprietors of bank

holding companies you may have to make a special effort to think in a
different dimension because you find yourself in a new world.
I hope this does not add up to a gloomy picture.
to do so.

It is not meant

The bank holding company has a major role to play in the U. S.
It can aggregate financial resources outside the main money

centers, and bring strong local financial resources to economic growth
areas that now suffer from the many deficiencies of absentee financing.
For this reason alone, I think it is important to encourage sound
bank holding company growth.

What I have tried to emphasize is that this

growth must be sound in the sense, first, that it strengthens the finan­
cial services available to the public, makes them more convenient, and
supplies new competitive striving for the favor of all who are served by
the financial community; second, that the bank holding company is still
in the banking business, with its special public responsibilities; and
finally, that development of bank holding companies —

individually and

as a movement -- should proceed on a go-slow basis that takes its speed
limit from the time required to assure sound management, both of the banks
and the non-banks in the holding company system.
These are not restraints.

They are specifications for strong

foundations, from which both the banking community and public will